Yahoo has first comer advantage on Yahoo stock message boards, but is mismanaging that asset.Yahoo has advantage on games, but is mismanaging that asset.Yahoo had advantage on business ratings (e.g., local restaurants), but Yelp is much better and will take over that niche.

AOL Inc. and several private-equity firms are exploring making an offer to buy Yahoo Inc., according to people familiar with the matter, devising a bold plan to marry two big Internet brands facing steep challenges.

Silver Lake Partners and Blackstone Group LP are among the firms that have expressed interest in teaming up with AOL to buy Yahoo or trying to take it private on their own, these people said. They added that at least two or three other firms could be interested in participating if a formal buyout proposal is drawn up.

The people familiar with the matter cautioned that these discussions—involving private-equity firms, AOL executives and financial advisers—are preliminary and don't yet involve Yahoo. The conversations may not lead to an approach given the complexities in structuring a proposal, the people said.

Spokeswomen for Yahoo and AOL declined to comment.

AOL, which spun off from Time Warner Inc. in late 2009, currently has a market capitalization of $2.68 billion, far smaller than Yahoo's $20.56 billion market value.

Shares of Yahoo jumped 5.7% to $15.25 on Wednesday in one of the highest volume days of the year. The stock traded 49.6 million shares, compared with an average of 17 million shares a day so far this month. It was one of the best performing tech stocks of the day, far outperforming the Nasdaq's 1% rise.

One of the scenarios under discussion among the buyout firms is a complex deal in which China's Alibaba Group would buy back Yahoo's roughly 40% stake in Alibaba, the people said.

Some of Yahoo's other assets would also be sold off to interested media or technology companies, and the remaining company would be of a much smaller valuation that private-equity firms could get financing for, one of the people said.

Another scenario involves AOL combining its operations with Yahoo in a reverse merger after Yahoo disposes of the Alibaba stake, the people said. It is unclear if the resulting entity would be listed publicly or taken private.

Alibaba's Chief Executive Jack Ma has expressed interest in repurchasing Yahoo's stake in his company, which analysts value at around $10 billion. A chunk of Yahoo's current market value comes from its Alibaba stake.

Separately, AOL Chief Executive Tim Armstrong has also talked privately about the idea that Yahoo could buy AOL, according to a person familiar with the matter. Another person familiar with the matter said private-equity firms may also look to partner with media companies to buy Yahoo.

A combined Yahoo-AOL would have greater scale to compete in online- advertising against industry juggernaut Google Inc. While both companies draw huge amounts of users, their advertising businesses have struggled as they've faced competition from a range of websites. The scenarios being discussed are similar to ones financial firms have discussed before. Yahoo and AOL discussed a merger in 2008, as Yahoo weighed a $45 billion takeover offer from Microsoft Corp. Microsoft eventually pulled its bid.

While private-equity firms have long contemplated a deal for Yahoo, talks have heated up in recent weeks as several senior Yahoo employees have left the company, intensifying pressure on Yahoo Chief Executive Carol Bartz to prove she can turn the company around, the people familiar with the matter said.

Ms. Bartz has improved the Yahoo's profitability by cutting costs, but revenue hasn't grown much and the company faces other problems. The Internet pioneer, for example, has shown fewer benefits than competitors from a broad recovery in display advertising—an area where it faces increasing competition from Google and Facebook Inc.

The company, which reports third-quarter earnings next week, claims that more than 600 million people use its home page, email service or other sites every month. But the number of Yahoo pages viewed by its users, known as "user engagement," began shrinking in the second quarter. Yahoo also has seen a drop in the value of advertising against content that Yahoo pulls from other sources.

Ms. Bartz, who has run Yahoo for 21 months, said in a recent interview she needed more time to pull off a turnaround.

Alibaba.com, a fast-growing Chinese electronic commerce site that is partly owned by Yahoo, said on Monday that its chief executive and chief operating officer had resigned amid an internal investigation of fraud at the company.

After a simmering feud that reached soap opera proportions, Yahoo and the Alibaba Group, the Chinese Internet company it partly owns, have reached an agreement over a Chinese payments processing company.

With SoftBank, another major investor in Alibaba, the companies announced on Friday a multipronged deal that guarantees Alibaba certain payments in the event of a public offering of the payments company, Alipay, or another liquidity event.

If Alipay goes public, Alibaba will be paid at least $2 billion but no more than $6 billion, plus certain licensing fees. Under the agreement, Alipay has also agreed to maintain its current relationship with the Chinese online retailer Taobao, one of Alibaba’s top e-commerce companies.

“Over the last few months, we have worked cooperatively with our partners at Yahoo and SoftBank to reach an agreement that serves the interests of all parties,” Jack Ma, Alibaba’s chief executive, said in a statement. “Most importantly, Alipay was able to secure the license it needed to continue operating.”

The resolution is a welcome one for the Alibaba’s investors Yahoo and SoftBank, which have been trying to reach a deal with Alibaba for several months. Last year, Mr. Ma spun Alipay out of Alibaba to secure licenses to operate as an electronic payments platform, amid new regulations in China. The company’s partners cried foul in May of this year, with Yahoo and SoftBank claiming that they had not approved the spinoff and only learned of the deal in March.

The debacle irked investors, who were bothered by Yahoo’s lack of knowledge and the loss of Alipay’s value to Alibaba’s portfolio. David Einhorn, the influential hedge fund manager of Greenlight Capital, dumped his entire stake in Yahoo, saying in a letter to investors that this “wasn’t what we signed up for.”

Yahoo’s 43 percent stake in Alibaba is considered by many to be its crown jewel, worth more than the company’s domestic business, which has struggled against rivals like Google.

“This is a good outcome for Yahoo and for our shareholders, as well as all the parties to this agreement,” Carol Bartz, the chief executive of Yahoo, said in a statement on Friday.

While the agreement resolves a contentious issue, investors remained cautious on Friday. Shares of Yahoo fell nearly 3 percent, or 40 cents, on Friday, and closed at $13.10. “On the face of it, it seems like a good deal for Yahoo, given how acrimonious the relationship with Jack Ma and Carol Bartz had become and how little leverage Yahoo had,” Jordan Rohan, an analyst at Stifel Nicolaus, said on Friday. But he said the drama also exposed how Yahoo’s fate in Asia is dictated by the whim of Mr. Ma.

“Even if the ownership of the rest of Alibaba group is not altered, the path forward seems to be controlled 100 percent by Jack Ma and his team,” he said.

The heavy hand of China’s government also looms large. Given the country’s strict regulatory environment, analysts raised doubts on Friday that an Alipay offering would come soon or be as lucrative as Yahoo hoped.

“They did not give any clarity on a potential timeline for an I.P.O.,” said Scott Kessler, an analyst with Standard & Poor’s. “The Chinese government also seems focused on domestic ownership for this company, thus making any global I.P.O. unlikely if not impossible.”

Bartz May Get $10 Million Payout After Being Fired by Phone as Yahoo CEO

By Brian Womack - Sep 7, 2011 11:03 PM ET

Carol Bartz, who was fired Sept. 6 as Yahoo! Inc.’s chief executive officer, stands to receive a payout in the range of $10 million after less than three years on the job.

Bartz, 63, would have received $10.4 million, including cash and equity, had she been fired at the end of last year, according to a April 29 filing by the company that estimated the payout. In addition, Bartz is still eligible for vesting stock options based on the shares reaching certain milestones in the future.

As it explores options for its future, Yahoo has hired Allen & Company as its investment bank, according to a person briefed on the matter.

The move by Yahoo’s board follows its firing of Carol A. Bartz as chief executive, amid dissatisfaction over the onetime Internet giant’s business performance.

In its news release announcing Ms. Bartz’s ouster on Tuesday, Yahoo disclosed that its board had begun “a comprehensive strategic review” of its businesses. Within the language of the deal community, that phrase generally means possible acquisitions or asset divestitures — or possibly a sale of the whole company.

But people familiar with the board’s actions say that a sale of all of Yahoo is a “nonstarter.” What could be more likely are the sales of Yahoo’s Asian holdings or some of its communications services.

Helping to review those possibilities is Allen & Company, the boutique known as a top consigliere to Internet and media companies. Among its current clients is AOL, itself the subject of takeover rumors.

The bank is also serving a lesser underwriting role for two forthcoming Internet initial public offerings, those of Groupon and Zynga.

Yahoo’s board may also look to hire additional bankers to work alongside Allen & Company. Among the likely candidates is UBS, which is already advising Yahoo on a possible sale of its stake in Yahoo Japan. Another possible candidate is JPMorgan Chase, which could be brought in for its expertise in tech deals and its big balance sheet.

“Yahoo has been working with Allen & Co. and UBS for some time,” a spokesman for the company’s board told DealBook in a statement.

The first task that Allen & Co. may have to deal with is handling unsolicited deal inquiries. AOL’s chief executive, Tim Armstrong, has held discussions with Yahoo advisers about the company’s interest in merging, Bloomberg News reported on Friday.

A person close to Yahoo told DealBook that the company has no interest in merging with AOL, given that it’s another struggling Internet company.